Pradhan Mantri Vaya Vandana Yojana (PMVVY) was launched in May, 2017 to provide a long term income option for senior citizens in the country. This assumes importance in the wake of low interest rate scenario we find ourselves in. Fixed deposits are getting renewed at lower rates. This poses problems to those senior citizens who rely on interest income to meet regular expenses.
LIC has come out with PMVVY product with guaranteed interest rate of 8% for 10 years. Let’s find out more about the product.
Salient Features of Pradhan Mantri Vaya Vandana Yojana (PMVVY)
- Minimum Entry Age: 60 years (completed)
- Maximum Entry Age: No Limit
- Policy Term: 10 years
- You will be paid pension for 10 years
- You can choose pension payment frequency i.e. monthly, quarterly, half-yearly or annual
- Minimum Pension: Rs 1,000 per month, Rs 3,000 per quarter, Rs 6,000 per half year or Rs 12,000 per year
- Maximum Pension: Rs 5,000 per month, Rs 15,000 per quarter, Rs 30,000 per half year or Rs 60,000 per year
- Since the interest rate is fixed at 8% p.a., you can derive the minimum and maximum investment amounts from the minimum and maximum pension levels. You can use monthly compounding to calculate such amounts. I am reproducing information from LIC website.
- The scheme is exempt from Goods and Services Tax (GST).
- With monthly compounding, the effective annual return is 8.3% p.a.
- This ceiling of pension is for the entire family. The total amount of pension under this policy to a family cannot exceed the maximum pension limits as mentioned above. The family includes self, spouse and dependants.
- The scheme is open till May 3, 2018. Quite possible when the scheme is re-launched next year, the interest rate on offer may be quite different.
- The amount of pension is not dependent on age. This is not the case with other pension plans.
- You can take loan up to 75% of the purchase price after 3 years.
- There is no exclusion on account of suicide. The purchase price will be returned to the nominee even in case of suicide.
You can read about various product features in detail on LIC website.
Pension Payment, Death Benefit and Maturity Benefit
These are along expected lines.
Pension will be paid for a maximum of 10 years as per payment frequency chosen.
In the event of the death of policy holder during the policy term of 10 years, the purchase price shall be returned to the beneficiary.
In the event of survival till maturity, the purchase price along with the final pension installment shall be payable.
Premature Exit in PMVVY
Premature exit is allowed only if the pensioner needs money for treatment of any terminal/critical illness of self or spouse. In case of such surrender, there will be premature exit penalty of 2%. You will get back 98% of the purchase price.
Tax Benefit for Investment in Pradhan Mantri Vaya Vandana Yojana (PMVVY)
There is no tax benefit for investment in PMVVY.
How is Pension Income taxed?
Such pension income will be taxed at your marginal income tax rate.
There is no tax charged when the purchase price is returned at the time of maturity or death.
SCSS vs. PMVVY
When I think about PMVVY, one of the existing schemes that deserves attention is Senior Citizen Savings Scheme (SCSS).
PMVVY provides guaranteed return of 8% for 10 years, SCSS provides a slightly higher return at the moment (8.3% p.a.).
With SCSS, you can lock in interest rate for only 5 years. If you want to extend or renew, you will get the prevailing rate. SCSS interest rate is announced by Ministry of Finance every quarter. With PMVYY, you can lock in interest rate for 10 years.
With SCSS, you get tax benefit under Section 80C of the Income Tax Act. No tax benefit under PMVVY.
With SCSS, you can invest Rs 15 lacs each in your and your spouse’s name i.e. Rs 30 lacs in total. On the other hand, with PMVVY, you can invest a maximum of Rs 7.5 lacs for the entire family.
With SCSS, payment frequency is quarterly. With PMVVY, the payment frequency can even be monthly.
Income from both the schemes will be taxed at your marginal income tax rate.
In my opinion, SCSS is a better product due to its higher interest rate and better liquidity. However, I can see PMVVY can be more useful in many cases.
Positives of PMVVY
PMVVY is a simple and easy to understand product. You get what you see.
If you compare with a bank fixed deposit, the scheme offers much better interest rate than a plain vanilla fixed deposit (at the moment).
You can lock in the interest rate for 10 years. Well, this can be a double edged sword.
Premium (purchase price) does not depend on age. Good for those who are in their 60s (for annuity rates are likely to be lower than 8%)
In my opinion, this is a decent option at present for those who want to keep things simple.
Negatives of PMVVY
Do note PMVVY is not an annuity product. Therefore, you do not lock in interest rate for life. You do it only for 10 years. After 10 years, if the scheme is still on offer, the interest rate offered may be way different than 8% p.a.
The investment is capped at Rs 7.5 lacs for the entire family. Therefore, the quantum of income from this scheme is capped.
You cannot access money expect in case of serious illnesses. There is facility of loan after 3 years but I wouldn’t go that far. I don’t like to pay to access own money.
Income is taxable. Effective returns can be low for investors in the highest income tax bracket.
You need to see applicability
For instance, someone who falls in the 30% tax bracket, the effective return is only 5.6% per annum. If this person is willing to take some risk, a Systematic withdrawal plan (SWP) from a good quality debt fund (and not equity fund) may be a good choice (more tax efficient).
Do note SWP can be a bit complex. It is not difficult to select a wrong fund for setting up a SWP. Recently, SBI MF deliberately tried to mislead customers into selecting a wrong fund for setting up a SWP.
If you are quite old, say 75 or above, you may get a much better income with an immediate annuity plan.
However, PMVVY may be a good idea for those investors who fall in the lower income tax bracket (and who are in their early 60s) and are looking for a simple product.
Remember that PMVVY is an income product. Do not invest in this product unless you need regular income.